Exclusive: China-backed fund in third bid for U.S. to approve chip deal - sources

(Reuters) - Canyon Bridge Capital Partners LLC, the China-backed buyout fund that agreed to acquire Lattice Semiconductor Corp (LSCC.O) in November for $1.3 billion, will submit the deal for U.S. review for the third time, people familiar with the matter said on Sunday.

The move comes as Canyon Bridge seeks to get the deal approved by the Committee on Foreign Investment in the United States (CFIUS), a government panel which reviews corporate acquisitions for potential national security risks.

The standard CFIUS review lasts for up to 75 days. Canyon Bridge submitted the deal for CFIUS review in January and refiled it in March. Refiling with CFIUS resets the clock and provides up to another 75 days for review.

Canyon Bridge has been seeking to convince CFIUS that it will run Lattice without influence from the Chinese state, the sources said. Several U.S. lawmakers expressed concerns about the deal after Reuters reported last year that Canyon Bridge is funded by cash originating from China’s central government, and also has indirect links to its space program.

Few deals have ever filed for CFIUS review three times. However, vacancies left in senior positions at several government agencies, almost five months after the inauguration of U.S. President Donald Trump, have reduced CFIUS’ capacity to review cases expeditiously, and are weighing on its decision-making ability, the sources said.

Canyon Bridge and Lattice are hoping that some key government appointments in the coming weeks, such as that of Heath Tarbert, who has been nominated as Assistant Secretary of the Treasury for international markets and development, will help resolve the impasse with CFIUS, one of the sources added.

The sources asked not to be identified because the CFIUS review process is confidential. Portland, Oregon-based Lattice declined to comment, while Canyon Bridge and a CFIUS spokesman did not immediately respond to requests for comment.

Lattice shares closed at $6.86 on Friday, about 17 percent below the $8.30 per share in cash that Lattice shareholders stand to receive if the company’s sale goes through, underscoring the uncertainty over the deal’s prospects.

Time is running out to complete the deal. Canyon Bridge’s and Lattice’s agreement has an Aug. 1 deadline for the deal to close, and the acquisition cannot be completed without CFIUS clearance. The two companies would have to negotiate an extension to the deal deadline if the CFIUS review has not been completed by then.

CFIUS DELAYS

In a further sign of strains in the CFIUS system, U.S. electronics maker Inseego Corp (INSG.O) said earlier this month it had scrapped a $50-million deal, clinched last September, to sell its MiFi mobile hotspot business to Chinese smartphone maker TCL Industries Holdings, citing “delays and uncertainty in securing (CFIUS) approval.” Like Canyon Bridge is about to do, TCL had refiled for CFIUS review twice.

Proponents of U.S. openness to foreign investment fret that CFIUS may become a tool of economic protectionism as a result of Trump’s “America first” policy agenda. However, it is not yet clear what broader stance CFIUS will take towards Chinese acquirers under Trump, who has criticized Chinese trade practices but is also looking for Chinese cooperation in tackling North Korea’s nuclear ambitions.

“There are some technical issues and some technical changes that we are working on legislative fixes for CFIUS, but I would say fundamentally we want to keep CFIUS as a national security review, and we want to deal with economic issues separately,” U.S. Treasury Secretary Steven Mnuchin said at forum on China in Washington, D.C. earlier this month.

The semiconductor industry has long been seen as one of the most sensitive sectors from a U.S. national security perspective, because it provides chips for a plethora of applications and devices, from smartphones and satellites to missiles and power grids.

Lattice, whose chips are used in smartphones, laptops and televisions, has said it does not design or manufacture military-grade products, and that its small sales to the military pertain to general-purpose parts without advanced applications. It has also stressed that it does not have any factories that can be compromised, because all of its manufacturing is outsourced.

To help launch Canyon Bridge as a U.S.-based fund, its founder Benjamin Chow last year tapped Cypress Semiconductor Corp (CY.O) executive chairman Ray Bingham as his partner. Bingham now faces a shareholder campaign to remove him from the board of Cypress over potential conflicts of interest associated with his participation in Canyon Bridge, which he has denied.

Another important test case for China’s ability to acquire U.S. semiconductor companies will be Xcerra Corp (XCRA.O). China-based semiconductor investment fund Unic Capital Management agreed to acquire Xcerra Corp for $580 million in cash in April.

Norwood, Massachusetts-based Xcerra does not make chips like Lattice, but designs and manufactures equipment to test semiconductors and circuit boards. Were CFIUS to block the deal, it would illustrate how high the U.S. regulatory bar is for Chinese acquirers.

Reporting by Liana B. Baker and Greg Roumeliotis in New York; Editing by Nick Zieminski